6 Financial Mistakes Small Businesses Should Avoid Making
Most businesses start small, and then gradually grow into their bigger versions. However, some businesses never grow. This is because they don’t learn from their mistakes, and choose to sticking to same old strategies and methods. It is surprising that majority of small businesses that fail have common reasons behind it.
Here are the top 6 financial mistakes that small businesses make all the time:
1) Chasing Long-Term Goals Too Early
A lot of small businesses make the classic mistake of entering long term financial commitments early. They moment they secure funds for business they start feeling secure, and end up investing in long term goals. For instance, such a business would invest in more employees, office space expansion, etc. While there is nothing wrong in this if the business so requires, however, these are the areas which should be attended to with a rational approach, rather than an unplanned one.
Securing investment is an important step for any small business, but one shouldn’t splurge it all away recklessly. It is important that the entrepreneur invests the money, at the outset, for short-term goals, rather than the long-term goals only. Business growth is a slow process, and capital can only do so much to help it.
2) Ignoring the Importance of an Accountant
When your business is young, it is natural to feel like saving as much costs as possible. However, not all expenses are unimportant. For instance, paying for an account can be a good idea for your business, because it is important to keep a track of expenses. You need to know where the money is going, as it can help you shape and alter your business strategy, and inform you where you are going wrong.
While you can certainly take care of accounting yourself, or have someone else who is not trained particularly in the area do it for you, there is a risk of error involved this way. Only a trained and experienced accountant can do justice to the job.
Apart from money tracking, hiring an account has another huge advantage too- tax savings. A lot of businesses overpay taxes, simply because they are not aware about the expenses that are tax-free, or methods that can help them save money on taxes. An experienced accountant can be incredibly helpful thus.
3) Merging Business Funds With Personal Funds
Under no circumstances you should merge your business investment with personal funds. This is because this comes with a huge risk, that can have serious repercussions on you and your family, should things take a turn for the worse.
Due to shortage of investment, and sheer passion towards making their business successful, a lot of budding entrepreneurs add their personal savings to the capital they have raised from angel investors, lenders, etc. This often ends up in a mess, with the damage affecting their families and loved ones. The same goes for the habit of taking out money from piggy bank in small amounts just to meet certain periodic requirements- fulfilling purchase orders, paying salaries to employees, etc. This habit can easily make managing accounts, and paying taxes a big headache.
There are countless examples of small businesses that ended up going kaput, simply because they failed to keep up with the burn rate. It may come as a surprise, but a business can run out of funds within just one year. This is also the reason undercapitalization is one big problem associated with new businesses.
Many budding entrepreneurs underestimate the capital requirements for their businesses. They often believe that they can become cash flow positive within one year of operation, and then use the money for marketing, increased production, and thus increased profits. Unfortunately, more often than not, things don’t go as they plan, and they run out of money sooner than expected.
Smart business owners know the importance of raising capital. Therefore, they repeat investment rounds frequently. Raising money for starting a business for one time is not enough. You must go out there and raise money again and again, until your business is self-sufficient not just in theory, but also on the paper.
5) Premature Diversification
One of the reasons why a lot of young businessmen fail is because they want more in less time. They often make decisions based on what they observe in other established businesses. For instance, they diversify their business model, or embark on new ventures prematurely, rather than investing in their existing business first. In most cases this is not a wise decision.
Only if the foundation of your business is strong you can think about diversification. If the base of your business is weak, then it can collapse when new branches are added. Thus, new ventures should only be entertained when your business is well established first.
6) Allocation of Resources
One of the things that decide whether your business goes on to become a success, or a failure, is how you allocate your money. Since your business is small and new, you can’t afford to make mistakes that cost you money. Only those businesses that have high positive cash flow can take risks that involve financial loss. You, on the other hand must make every penny count. Therefore, allocation of resources is an important task.
Here are some areas where you can think about spending money on:
- Adequate and Quality Staff
- Robust Technology
Here are some areas where you should rather avoid investing in:
- Expensive Office Space
- Unwanted fixed and depreciating assets
Building a successful business has a lot to do with how you deal with your mistakes, and improve the areas where you go wrong. However, when you can avoid mistakes in the first place, the process becomes a lot easier. The mistakes mentioned above are common to several small new businesses, and you can certainly learn from them for your own business.